Category: News

Adnan Adams Mohammed

The government is likely to miss its end of the year inflation target by 0.7 percent according to the latest Economist Intelligence Unit (EIU) report.

The EIU, in reviewing Ghana’s economy projected that the country’s inflation would end the year at 8.7%. This is 0.7% higher than the finance ministry’s projection of 8 percent in the 2020 budget statement.

This means the prices of goods and services will largely remain same, whilst interest rates stay low.

“Despite a sharp downturn in economic activity, we expect annual average inflation to edge up in 2020, to 8.7% (from 8.5% in 2019), reflecting ongoing currency weakness and upward pressure on the prices of some goods as a result of pandemic-related restrictions and shortages”, it said in its review of the Ghanaian economy.

Further, it said inflation will then moderate in 2021, to 8%, helped by a slower pace of cedi depreciation, although this will be partly offset by the impact on imported inflation of a pick-up in global commodity prices.

From 2022, it, however, expects inflation to rise.

It believes that the Bank of Ghana will keep inflation within the official target band, but with relatively slow fiscal consolidation, robust domestic demand a

nd ongoing currency depreciation.

According to EIU, inflation will remain elevated, at an annual average of 8.8% in 2022-24.

Year-on-year inflation remained unchanged at 7.8% in March 2020.

According to figures by the Ghana Statistical Service, month-on-month inflation between February 2020 and March 2020 was, however, 0.8%.

On Friday, 17th April, 2020, while Ghanaian authorities were assessing the performance of the measures put in place to deal with COVID-19, Moody’s, a credit rating agency released a report that maintains the rating for Ghana but revised the outlook from positive outlook to negative outlook.

The negative outlook signals low confidence and uncertainty about the repayment capability of the Ghanaian economy going forward. This is negative news. This is a negative development as the same Moody’s revised upward from stable to positive early this year.

Do we blame this on COVID-19 pandemic? It depends on the appreciation of economic data. The revised and finalized economic data for Ghana showed uninspiring pre-2020 economic data that reflects negative primary balance, low international reserve, low revenue compared to expenditure. Also, 2019 showed very high fiscal deficit and deteriorating debt to GDP ratio, general liquidity challenge and cost of tradable bonds moving up the yield curve.

Above all, the fiscal deficit implied a clear abandonment of the fiscal responsibility act as the upper ceiling statutory deficit level cannot be complied with.

The 2020 revised projections presented the economy as a fragile framework to investors and rating agencies. The appetite to grab funds everywhere and eat in the same bowl of hitherto weak economies crying for debt relief tells an ordinary observer that uncertainty surrounds us.

The point, already known, is that rating agencies use both historical data and prospects of the economy to do their evaluation. Hence, the economy was already attracting bad rating comments before COVID-19.

But can we blame COVID-19? Yes. Why? Because COVID-19 has worsened revenue prospects of the economy, suspended the fiscal responsibility framework and demonstrated in the past few weeks that the country is resource hungry and “debt aggressive”.

We cannot blame COVID-19 for the historical economic out-turn but the pandemic has seriously affected the prospects of the economy and the negative outlook can be squarely blamed on coronavirus pandemic.

However, there is a regulatory principle in credit rating that rating agencies ought to measure actions being taken by economic managers in a crisis rather than rating comments, which will rather worsen the ability of economic managers of countries. Moody’s should have focused on the efficacy of measures taken especially when the difficulties in repayment are known. This way, the rating decision will fairly accommodate the measures adopted by the economic managers.

Prof John Gatsi,

Adnan Adams Mohammed

Energy expert has estimated that consumers of petroleum products should expect the average price of diesel and patrol at the pump drop as low as GH¢3.50 per litre and GH¢4.00 per litre, if oil prices remain in the US$20 to 25 per barrel and US$30 to 35 per barrel ranges on the world market respectively.

“Ghanaian consumers should see the price at the pump drop”, Alex Mould, former CEO of NPA and GNPC has posited in a write-up he shared to our news desk, expatiating that, “I estimate that we could see the pump price go as low as GH¢3.50 per litre if oil prices remain in the US$20 to 25/bbl range and GH¢4.00 per litre if prices rise to US$30-35 range. However, all this is dependent on whether or not our cedi remains stable in the current FX range of GH¢5.5 to 5.8 per US Dollar.”

These will be dependent on the relative strength of the local currency (Ghana Cedi) comparative to the current foreign exchange rate range of GH¢5.5 to 5.8 to a US$1.0. Data from the Foreign Exchange market shows the cedi depreciated by 0.72% against the U.S. dollar, trading at an average price of GHS5.63 to the U.S. dollar over the period under review; from a previous rate of GHS5.59 recorded in the second pricing-window of March 2020. The Institute for Energy Security has, however, forecasted pump prices to remain largely unchanged for the second pricing window beginning 16 April 2020.

“Taking into consideration the relatively modest reduction in the prices of petrol and diesel on the international market, as well as the 2.29% marginal reduction in the price of International Benchmark – Brent Crude; the Institute for Energy Security (IES) foresees prices of fuel on the local market remaining largely stable”, IES predicted base on their trend and market behavior analysis in a statement it released last week. But noting that, “Competition between Oil Marketing Companies (OMCs) to control and gain more market shares may result in the selling price of fuel falling marginally within the second pricing-window of April 2020.”

From a consumer perspective, low oil prices on the international market should translate to lower fuel prices at the pumps, which then translate to reduced transportation costs, cascading to a reduction in the cost of goods and services and food.

The Good news is that, last week, the National Petroleum Authority (NPA) in a circular announced that, Ghana Oil Company (GOIL) had reduced its pump prices by 10 percent in the deregulated petroleum product pricing system. This was expected to force other oil marketing companies to also reduce their prices at the pump. This brought down pump prices from GH¢5.3 per litre in February to the current price of approximately GH¢4.3 per litre (April 2020), although lower than as expected by many energy experts and analysts.

The bad news though is that government with oil prices below US$30/bbl, will experience a drop in oil’s contribution to GDP and government revenues. This slow down on the economy will severely affect the government’s discretionary spending; and the impact will be felt on many of its infrastructure and capital expenditure projects e.g. roads. Which may in turn impact consumers’ costs, if not managed appropriately.

Ghana will likely to see a revenue drop from US$1.1 billion to less than US$600 million by the end of 2020. As a result, the net revenue to the Government of Ghana will be less than US$400 million after GNPC pays for its share of development and production costs.

This means the oil contribution to the country’s GDP will drop by US$2 billion this year and contribution to government revenue will also drop by nearly US$600 million (approximately 50%).

Mr Mould, in discussing the impact of the COVID-19 in the write-up proposed some solutions that can help mitigate the negative impact on Ghana’s economy as an importer and exporter of oil products.

He proposed that, hedging part of the country’s share of the oil production would have saved the nation some revenue in this disturbing moments and therefore urged the government to consider a risk management policy; such as hedging post-COVID-19 pandemic.

“Also we have seen a slowdown in G&G activities (Rig count is at it’s lowest in 10 years) with some development projects delayed and some oil service contracts rescheduled or postponed.

“This will have to force the government to seek opportunities for strategic cost-management measures and enact them such as; reduce its wage bill by rightsizing non-essential workers, as there has been a huge increase in the workforce especially in the parastatals and a large number of political appointees may have to be down-sized as well; and rationalizing all subsidies especially in the power sector.

“Also; as airports are shut to commercial airlines, special flight arrangements have to be made to keep our production FPSOs manned. Some major players have stopped short of citing Act of God or Force Majeure. Aker, for instance, has requested a postponement to deliver the final Plan of Development (PoD) and has even cancelled some of its long lead development contracts.

“We are bound to see a rising number of legal cases for compensation for these postponed or cancelled contracts”, he noted.

Adnan Adams Mohammed

The controversial ‘Cylinder Recirculation Recovery Margin’ introduced by the National Petroleum Authority (NPA), expected to allow LPG operators charge GHp13.5 for each kilogram of LPG, have been withdrawn.

“That slight increase in price that you saw in the papers, it has been withdrawn. The recirculation module, I think as you are all aware was a very noble thing introduced by the government. That amount you saw was supposed to level up the prices. It has been withdrawn,” The Minister of Energy, Peter Amewu disclosed this at a press briefing last week Thursday, April 16, 2020.

The Minister said the government will subsequently decide on the wayforward in relation to the levy after a careful review by Cabinet.

The Chamber of Petroleum Consumers and the Consumer Protection Agency had sued the National Petroleum Authority (NPA) over the introduction of the Cylinder Recirculation Recovery Margin.

The two companies in their writ of summons argued among others that the NPA failed to consult with various stakeholders before introducing the policy.

“Plaintiffs state that the failure of the 1st defendant to consult with the service providers before the introduction of the new petroleum pricing formula has led to agitations among such service providers, particularly, the LPG Marketing Companies Association of Ghana (LPGMCs) who have issued a statement calling on the 1st defendant to withdraw the CRM.”

The NPA on Wednesday, April 1, 2020, directed industry players to begin charging 13.5 pesewas on each kilogram of LPG.

It also instructed Oil Marketing Companies (OMCs) to increase the levy on Fuel Marking Margin from three pesewas to 4.5 pesewas per litre on every product.

The NPA explained that the introduction of the Cylinder Recirculation Recovery Margin was aimed at supporting stakeholders in the supply chain ahead of the implementation of the Cylinder Recirculation Model.

Although the NPA justified the move, some industry watchers have however said that both directives are unlawful and must be withdrawn with immediate effect given the impact it will have on the business.

NPA in its release issued on Friday, April 4, 2020, maintained that such calls are unfortunate because its projection rather shows that for this very pricing window (1st April to 15 April, 2020), consumers are expected to enjoy a price reduction of about 11.56 percent even with the introduction of the Cylinder Recovery Margin.

“The attention of the National Petroleum Authority (NPA) has been drawn to a statement issued by the LPG Marketing Companies Association of Ghana (LPGMCs) on the above subject, dated April 3, 2020, calling for the withdrawal of GHp 13.5 Cylinder Recovery Margin which took effect on April 1, 2020. We wish to state categorically that, contrary to their claim that the introduction of the margin will increase the product price at the pumps and thereby burden the consumer, the facts as they stand do not support that.”

“The margin is, therefore, to assist the marketers to offset some of their financial expenses, in accordance with the full cost recovery principle of petroleum products pricing in Ghana. It is therefore unfortunate for the LPGMCs to hold such a position”, it added.

The NPA had said it will continue to engage with stakeholders over concerns raised regarding tax components on LPG.

“We are certainly aware of the difficult situation we all find ourselves in at this time, and the last thing we will do is to further burden the consumer with additional taxes. The NPA would, therefore, like to assure members of the general public of our commitment to ensure product availability, affordability, and accessibility, while ensuring the safety of the general public and the business viability of players across the value chain”, the statement concluded.

Adnan Adams Mohammed

Government is advised to use part of the money raised from the US$3 billion Bond raised later part of January to keep the economy in a holding pattern during the lockdown to reduce its blowback on citizens and businesses.

A former Executive Director of Standard Chartered Bank, Alex Mould further admonished that, government will need to seek funding from the multilateral development banks such as the World Bank, AfDB, and IMF to stimulate the economy post-lockdown. “Looking at the median spend by most countries this comes to about 1-2% of GDP; if we use the average of 1.5% of GDP this brings our required spend close to US$1 billion.”

The financial expert has intuited that, Government should resist the temptation to prematurely end the lockdown in haste; but must weigh both global and local conditions in order to make a well-informed decision for the long-term greater good of Ghanaians. In the interim, some interventions can be immediately implemented to improve the prevailing state of affairs. He indicated that, there will be two economic phases in tackling the crisis arising from this COVID-19 pandemic by governments, especially in the developing and less developed countries.

“The first phase is to address the effects that a prolonged lockdown of approximately 2-3 months will have on families and businesses. Most individuals may be forced to expel their savings to survive in the lockdown period as their income and/or revenue dwindle. And the second phase is how to restore the economy back on track, post crisis”, he explained.

Also, the expert suggested that, planning now for funding post-COVID-19 is essential, as demand is expected to be down for most discretionary spend sectors i.e. tourism (airlines, hotels), entertainment (restaurants), retail, etc.

“Also, we can expect lower than normal savings’ balances in the banks resulting in needed support from government in the form of reducing reserve requirements and injection of new money to achieve the liquidity needed for new loans.  Banks will have to provide the much-needed funds in the form of soft loans to qualified companies, small and medium enterprises etc. – including traders – who form the backbone of the informal sector.

“For starters, the vulnerable- i.e. aged, distressed families, street children/hawkers, homeless etc.- in our society have to be catered for. One way this can be achieved is by providing financial support and funding to them.”

According to Mr Mould, as mentioned earlier, small and medium businesses particularly will be heavily hit; and thus require some much needed assistance in the form of tax reliefs, stimulus packages etc. to stay afloat, as they will most likely struggle to pay employees due to the COVID- 19 pandemic. Government can lend a helping hand by suspending payments of employee and employer social security and income tax of private companies, to allow them use the cash in other ways. Banks and financial institutions can provide qualified businesses with liquidity in the form of zero interest loans and “tide over” soft loans to encourage furloughing instead of outright layoffs; so they can protect jobs by keeping on as many staff as possible.

“Additionally, government needs to immediately curb inflation and start planning for the post- COVID-19 recovery of the economy to avoid a recession. There is bound to be a logistics and supply chain gap to and from lockdown areas, which will consequently cause price hikes. Food security will come to the fore and of not tackled this could become a National Security issue; so, with respect to agricultural produce, the Ghana National Buffer Stock Company has a critical role to play in bridging this supply chain gap so as to ensure regular sustainable availability of food and more importantly keep inflation of food items at a minimum.

“These supply chain challenges will not only be felt on the local front, but globally as well. How will our foreign supply chain be impacted? Importation will inadvertently be affected as there is a dependency on and preference for foreign essential goods over local goods. Government would therefore have to ramp up local manufacturing to meet demands. For instance, in the COVID-19 fight there has to be a local content re-alignment of businesses and infrastructure to meet human and medical needs. Local manufacturing of PPEs e.g. retooling seamstresses to make masks, carpenters to make beds for medical facilities etc.”

Before the intense spread of COVID-19 to the rest of the world, this year had already started as an interesting one for the oil industry. We observed a production war between Russia and Saudi Arabia-really a war between Russia and USA; which led to over-production and consequently, the immediate collapse of the oil price to as low as US$20 per barrel.

Now in the heat of its spread, the pandemic has effected a two (2) percent slowdown in development of all economies globally – with of course, some countries being hit harder than others. Global consumption has dropped from a high of about 90 million barrels/day to less than 70 million barrels/day, which is a tremendous impact to the supply and demand curve guiding the oil industry.

This drastic slowdown of oil and gas demand, coupled with the impacts of a brutal price war among the powers that be, has the industry struggling to maintain the status quo in comparison to the recent past. There were calls last week for a truce between these producers which needed the Organization of the Petroleum Exporting Companies (OPEC members) to all agree on supply cuts. This seems to have been somewhat successful, as prices have risen to over US$30/bbl, and should remain in this range ($30-40/bbl) for the next 2 months should these producers adhere to the supply-cuts agreement. The rest of the world will have to wait and see if all parties in this cartel comply; something that’s very difficult to do.

In addition, the pandemic will lead to a recession of sorts in most countries, with the level of impact varying as a result of government’s ability to manage the economy while their countries lockdown, and stimulate the economy thereafter in the “new normal”.

The oil and gas industry like all others will have to patiently wait as demand begins to rise slowly as the world reopens and gains a foothold on managing the virus.

Adnan Adams Mohammed

The government of Ghana has been admonished to consider hedging as revenue risk management with respect to our oil production.

“There should be a policy to take out price insurance (hedge using financial derivatives) on a certain percentage of our oil using the benchmark price (floor price) as determined by our Petroleum Revenue Management Act (PRMA)”, Alex Mould, former Boss of Ghana National Petroleum Corporation (GNPC) has suggested.

The renowned energy and financial expert further retorted; we need to review our stabilization and heritage funds. What are their objectives? Should more money be allocated to them? It is the perfect time to take a second look at restrictions on what instruments these funds can invest in; as we need to improve on our investment strategies. To do that means we need qualified fund managers and investment officers.

“Take the Norwegian Sovereign fund for example, which is one of the world’s richest Sovereign Funds. Part of their funds are invested in local oil companies, and they actively trade and change its portfolio investments”, the former Standard Chartered Bank Executive Director emphasized, stressing that “Yet in our case, due to the restrictions on the type of investments the Ghana Sovereign Funds are permitted to have, we have been averaging an investment return between 0.5% to 1.25% per annum, which is unacceptable.”

According to the PRMA, Ghana is only allowed to invest in Organization for Economic Cooperation and Development (OECD) government financial instruments and cannot even buy our own Ghana Government Eurobonds which gave a yield (rate of return) of 8.5% when originally issued in January.

Currently, GoG Eurobonds are trading at its lowest since issuance, at 70% of the original price – which gives a yield (rate of return) of 12+%. . ms missbalixo

“So this is a good time to invest in them especially for the Heritage Fund as the maturities of these Eurobonds are 30+ years.

“Another opportunity could also have been to take advantage of the 88% drop in Tullow’s price which is the closest traded proxy to owning part of the oil fields in Ghana.  An investment of a portion of the Heritage fund in Tullow (and/or Kosmos) shares when the price fell to GHp10 would have yielded a 200% return on investment as the share price is now above 30p, and far below the highs of £2.50 we saw a year ago”, the expert noted.

Adnan Adams Mohammed

A renowned financial and energy expert has added to calls on government to stay off its intention to seek permission to use the Ghana Heritage Fund as an emergency response fund to the fight against the global pandemic coronavirus (COVID-19).

Reechoing that, touching the Heritage Fund should be the absolute last option, and every government should resist the temptation of doing so irrespective of the cost of raising money elsewhere. But, the expert proposed that, the Heritage Fund should only be used as a bridge financing facility or a temporary line of credit to government.

Nonetheless, terms constituting such dire emergency situations to leverage the Heritage Fund need to be defined and agreed to, with a strong burden on government to prove beyond any doubt that they have exhausted all avenues to reducing costs and raising funds; only then should there be a National referendum to decide if these funds can be touched.

“Presently with the situation of the COVID-19 pandemic, if all options to raise money are exhausted and government is in a total bind to save human lives in the midst of this crisis, then in my view, the Heritage Fund should only be used as a bridge financing facility or a temporary line of credit to government”, Alex Mould, former Boss of Ghana National Petroleum Corporation (GNPC) advised the government.

This means that government must commit to, and replenish these funds within a clearly predefined repayment timeline with a dedicated source of funding– our future generations are counting on us for this.

Mr Mould expressed that, “In my opinion, the Finance Minister’s mention of the drawdown of the Heritage Fund, was not genuinely intended to generate approvals/buy-in to touch the fund on an immediate basis. I believe he mentioned it to prompt a debate amongst our law makers, and to test Ghanaians’ response to a possible drawdown of the fund, if serious considerations need to be made as a result of financial hardship in the country.

“When an institution (i.e. government) experiences a revenue shortage, the most prudent thing for the person in charge of finance to do, is to rally all the various heads of departments (in government’s case the Ministers), to review budgets and institute draconian cuts in expenditure. This must include recurring and discretionary expenditure. The government should focus more on operations and maintenance expenditure, and postpone all new infrastructure and non-core expenditure i.e. the nice-to-haves.

“Since the government has not fully completed such cost-management activities there should be no mention, as yet, of utilizing the Heritage Fund. Any discussion, at this stage, of utilizing the Heritage fund denotes a fragile economy that is unable to withstand the stress tests of shocks to it.”

Adnan Adams Mohammed

An energy experts has estimated that consumers of petroleum products should expect the average price of diesel and patrol at the pump drop as low as GH¢3.50 per litre and GH¢4.00 per litre, if oil prices remain in the US$20-25 per barrel and US$30-35 per barrel ranges on the world market respectively.

These will be dependent on the relative strength of the local currency (Ghana Cedi) comparative to the current foreign exchange rate range of GH¢5.5 to 5.8 to a US$1.0.

From a consumer perspective, low oil prices should translate to lower fuel prices, which then translate to reduced transportation costs, cascading to a reduction in the cost of goods and services and food. The Good news is that, last week, the National Petroleum Authority (NPA) in a circular announced that, Ghana Oil Company (GOIL) had reduced its pump prices by 10 percent in the deregulated petroleum product pricing system. This was expected to force other oil marketing companies to also reduce their prices at the pump. This brought down pump prices from GH¢5.3 per litre in February to the current price of approximately GH¢4.3 per litre (April 2020).

“Ghanaian consumers should see the price at the pump drop”, Alex Mould, former CEO of NPA and GNPC has posited in a write-up he shared to our news desk, expatiating that, “I estimate that we could see the pump price go as low as GH¢3.50 per litre if oil prices remain in the $20-25/bbl range and GH¢4.00 per litre if prices rise to $30-35 range. However, all this is dependent on whether or not our cedi remains stable in the current FX range of GH¢5.5-5.8 per US Dollar.”

However, the bad news though is that, government with oil prices below US$30/bbl, will experience a drop in oil’s contribution to GDP and government revenues. This slow down on the economy will severely affect government’s discretionary spending; and the impact will be felt on many of its infrastructure and capital expenditure projects e.g. roads. Which may in turn impact consumers’ costs, if not managed appropriately.

Ghana will likely to see a revenue drop from US$1.1 billion to less than US$600 million by the end of 2020. As a result, the net revenue to the Government of Ghana will be less than US$400 million after GNPC pays for its share of development and production costs.

This mean the oil contribution to the country’s GDP will drop by US$2.5 billion this year and contribution to government revenue will also drop by nearly US$600 million (approximately 50%).

Mr Mould, in discussing the impact of the COVID-19 in the write-up, indicated that, “Also we have seen a slowdown in G&G activities (Rig count is at its lowest in 10 years) with some development projects delayed and some oil service contracts rescheduled or postponed.

This will have to force government to seek opportunities for strategic cost-management measures and enact them such as: reduce its wage bill by rightsizing non-essential workers, as there has been a huge increase in the workforce especially in the parastatals and the large number of political appointees may have to be down-sized as well; and rationalizing all subsidies especially in the power sector.

Also; as airports are shut to commercial airlines, special flight arrangements have to be made to keep our production FPSOs manned.

“Some major players have stopped short of citing Act of God or Force Majeuer. Aker for instance, has requested a postponement to deliver the final Plan of Development (PoD) and has even cancelled some of its long lead development contracts.”

We are bound to see a rising number of legal cases for compensation for these postponed or cancelled contracts, he noted.